How to react to a Bear Market and invest wisely

It has been a wild ride for all those heavily invested in stocks and shares. The past few months, culminating in a huge drop on Christmas Eve have been testing the nerve of diligent investors. With no sector industry spared, a lot stocks have dropped by over 20% from their all time peaks.

A Bear Market is defined as a condition where the stock market has fallen at least 20% and there is widespread negative sentiment around it. The past few weeks have definitely felt like this. When heading towards Financial Independence how should one react? Here are some tips on how to best handle a situation like this.

Do nothing

Sometimes the wisest thing to do in certain scenarios is absolutely nothing. This is certainly true in a volatile market situation.

When share prices are swinging up and down or dropping like a stone, the worst thing you can do is to sell your holdings.

I certainly had a close family member who was contemplating selling their shares recently and vowing to never invest again. Selling is clearly not the way to go so I tried talking the person out of it. Instead they should hold and do the next step.

Buy more shares

This will always be tricky for me as I always aim to have most of my funds invested in income generating assets such as low cost index funds. Therefore I can only take advantage of low stock prices with my latest income. If you have the funds available; buying shares at depressed prices will provide additional firepower when the market eventually bounces back, which it will.

Maintain a low information diet

Avoiding constantly checking the news is a good idea. Vanguard Investments’s Jack Bogle said you should rarely peek into your portfolio. Once you do after a very long time you will probably need a cardiologist when you find out how much is in there.

There is always something going on in the news, from trade wars, elections, interest rate hikes, military conflict, government debt piles, company profit warnings, taxes etc. You name it and someone always claims that it influenced a stock market move.

I must admit that I haven’t been able to fully commit to this step; instead I enjoy reading about business activities of interesting companies such as Tesla and Apple, along with all the FAANG super technology players. This often leads me to places such as the CNBC site or various business news Apps.

To try and resolve this, I previously deleted all the apps and bookmarks to various sites when prices were falling. However, when prices began shooting app I could not help but reinstall everything so that I could monitor what was going on.

I have not yet found a way around this as the information is easily available on our fingertips 24/7; but I am sure that with long term experience of different market conditions this will become a non issue. Fortunately, I have not had an urge to sell anything but have been eager to buy more.

Enhance your financial education

To best understand how the world economy works and how investor behaviour can be influenced it is useful to read a few books on investing and finance.

Top reads are A Random Walk Down Wall Street, The Millionaire Next Door and The Intelligent Investor. This activity should be able to fill your time by adding value, rather than being swayed by sensationalised headlines from Wall Street and City’s giant marketing machines.

Focus on the amount of units you own

A tip which I have found very useful is to not worry about the share prices or a net worth chart’s gyrations. These metrics, by nature fluctuate heavily particularly when you have a larger portfolio, so they are not a true reflection of where the real value is. Instead, track and focus on the quantity of units of stocks and shares that you own.

Tracking investment fund units

You will realise that you will pick up more units when prices are lower. This has the effect of boosting dividends over the long term. As shown above, there appears to be an exponential increase in the units within my portfolio, despite market swings and a largely similar savings rate.

Stay the course

The final tip is to not be worried and maintain investing according to your plan. This is where an Investment Policy Statement (IPS) would be crucial. When things seem edgy you can always refer to the document to remind you of your overall objectives.

The same strategy works even when investing during a bull market. I have covered how to invest in a rising market here. It is impossible to predict where the market will go; at the the time of writing the markets had been staging an impressive recovery from the December 24th lows when they dipped into Bear territory.

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